PIPE Deal

Signifying "Private Investment in Public Equity," a PIPE deal is one in which publicly traded assets are sold privately, often to quickly raise capital.

In a traditional PIPE deal, a company will privately sell equity in publicly-traded common or preferred shares at a discounted rate relative to the market price to an accredited investor. In a structured PIPE deal, the issuing company issues convertible debt, which can usually be converted to the issuing company's stock at the purchaser's will.

Usually, the offering company is trying to raise capital, either because they need it quickly or because they couldn't acquire it through other means. The purchasing company (usually a hedge fund) has the advantage of buying at a discounted price; because these directly-sold shares are relatively illiquid, the purchaser is only interested if they can get the shares at a discount.

PIPE deals are popular because of their efficiency, especially compared to other kinds of secondary offerings, and because they are subject to fewer regulations from the Securities and Exchange Commission (SEC). Any publicly-traded company can initiate a PIPE deal with an accredited investor. This is especially useful for smaller or less well-known companies that might have trouble raising capital otherwise.

General interest in PIPE deals has varied over time. In 2017, a total of $45.3 billion was raised over 1,461 deals. In 2016, 1,199 deals raised $51.6 billion. However, that is less than the $88.3 billion closed over 980 transactions in 2008. PIPE deals tend to occur in markets or industries for which it is difficult to raise capital; thus, at the height of the 2008 banking crisis, PIPE deals were popular.

PIPE deals are somewhat less popular with shareholders, as the issuance of new stock for these sales dilutes the value of existing shares. In some instances, investors or companies with inside knowledge of the trade have shorted the issuing firm stock in anticipation. Some scholars have called for more intensive regulations to prevent such insider trading opportunities, arguing additionally that the generally small offering firms have little choice but to take bad deals with hedge funds to raise sorely-needed capital.